The S&P 500 (SPX) is set to open up 25 points, a 1.5% pop. This, after Friday’s 2% bounce that itself was a follow through from Thursday afternoon’s late day reversal. In all the SPX will be up about 4% from its 2016 intra-day lows on Thursday. While we were sleeping, crude oil has had a healthy bounce on news of an output freeze, Asian equity markets ripped with the Nikkei up 8% since Friday’s close, the Shanghai Composite did not collapse (actually is up more than 2.5% in two days) despite disgusting trade data after being closed for a week for their Lunar New Year, and we are getting a lot of headlines that look like this:
AND also From WSJ this morning:
Are we there yet?? I suspect not. I know that much of the volatility in U.S. stocks since the Summer has not been caused by our own economic data here in the U.S.. But to deny our inter-connectivity with that of the global economy would be wrong. Especially after a 7 year expansion that has our stock market up 200% from its lows in 2009.
I think it is safe to say that one of the intentions of QE was to lift the price of risk assets. Mission accomplished. But other stated goals have been to lower the jobless rate and raise inflation. While the unemployment rate is now lower (cut in half from its post financial crisis 2010 highs), there is little inflation to be found in the U.S. (despite mild increases in wages). And now the end of QE and ZIRP has actually been one of the main culprits of the deflationary spiral that has occurred in the last year and a half in commodities.
So for those who are paying some serious credence to the potential for another V bottom in U.S. stocks, you might want to consider the following fact, shared by @michaelbatnick on Twitter:
Via Deutsche Bank:
Since 2009, 82% of gains in the SPX and 91% of gains in the BKX occurred during periods of QE. pic.twitter.com/5WZY6qG8ye
— Irrelevant Investor (@michaelbatnick) February 16, 2016
The U.S. has had two consecutive years of 2% GDP growth, and if Q1 2016 is anything like the last two Q1s it’s going to be a disaster, possibly with a negative print. At this stage of the recovery, without training wheels (QE/ZIRP) that have made so many investors feel like geniuses, I am hard pressed to see a healthy equity return environment without some sort of pick up in global economic activity. And if that doesn’t happen, then we get some sort of extension of QE, or possibly a move towards negative interest rates which have been employed in parts of Europe and recently in Japan. If we do in fact get the latter in 2016, I suspect equities will be much lower, as corporate earnings growth will have stalled, sales growth gone negative and valuations looking hefty as investors contemplate the first meaningful year over year decrease in S&P earnings since 2011.
It’s my view that investors use a sustained bounce in stocks this month (if recent gains do sustain) to re-evaluate their broader thesis, and make some decisions about their time horizon and risk tolerance. Some of the stocks/sectors that got you here may not the be the ones that will continue to outperform or show relative strength, and re-allocation could be in order, or an all out de-risking.
As for the SPX, on a short term basis I think it finds some technical resistance at 1950:
If it gets through there, then maybe we see 200o-ish. But a look at the 8 year chart from the depths of the financial crisis in 2009 shows how the index has broken the uptrend, and could hit massive resistance there, placing that much more importance of a retest of last week’s lows just above 1800:
And below 1800, there is an air-pocket back to the 2000 and 2007 highs, just below 1600. That would mark a 25% peak to trough decline from the SPX’s all time highs made last May, or about half the peak to trough decline in the index from the 2000 and 2007 highs:
My intention is not to immediately dismiss a healthy bounce in global stocks from a very oversold condition. Investor sentiment got downright nasty of late and a bounce seems in order. My intention is to show how the volatility provides investors great opportunities to re-evaluate their current plan.
Aside from less pessimism in the last week, not much has changed, and the growing talk of more QE, or NIRP is not bullish for global equities. In the event the global economy does not see an expected lift in 2016, the time between here and new QE could be ugly. The technical set up for the SPX seems fraught with pitfalls if the best case scenarios do not soon emerge.